Collective investment trusts might be he scrawny younger sibling to brawny older mutual funds, but they’re coming on strong. So-called CITs are on a roll, driven by greater plan sponsor and record-keeper acceptance, as well as a greater awareness of low-fee alternatives by the general public.
Indeed, Reuters reports fund companies have shifted billions of dollars from their popular active products into collective trusts in order to compete with lower-cost passive competitors.
Boston-based research firm Cerulli Associates notes that they account for $2.4 trillion, or 16 percent, of the $15 trillion in 401(k) and pension marketplace, up from $1.3 trillion in 2009.
So, as with the previous explained products, who’s doing it right? Little surprise with who starts us off.
Manning and Napier
“MANNING AND NAPIER has been on the forefront of the evolution of the collective investment trust, and we’ve always been driven by looking out for the best interests of plan sponsors and participants,” says Shelby George, senior vice president of advisor services with the company. “With that said, there are a number of benefits for collective investment trusts, including different regulations which we saw early on as an opportunity for lower costs.”
Manning, for its part, launched its first product in 2000 and has focused since on “demystifying CITs.”
“We’re a 3(38) manager, so we take on that fiduciary role, regardless of whether it’s the execution of the portfolio or its management,” George adds. “As such, the fiduciary is tasked with ensuring plan sponsors and participants have access to the lowest cost products available. So it’s a best practice to at least evaluate CITs. It’s not that everyone should use them, but it’s certainly another tool for the plan sponsor to evaluate.”
Demystifying is an understatement, and the comprehensive information the company had on the space had us a bit overwhelmed. So in other words, investment geeks rejoice!
“Early CITs were pools of securities, traded manually, and typically valued only once a quarter,” Manning and Napier helpfully begins in one of its many educational pieces. “While popular in defined benefit plans, CITs were not as widely accepted in defined contribution plans due to operational constraints and a lack of information available to plan participants. Today, there is growing concern over how 401(k) plans are structured and the costs involved. Due to operational improvements, competitive fees, and accessible information, we are seeing a resurgence in the popularity of CITs.”
Amen.
Charles Schwab Bank
IF YOU DON’T THINK you can use CITs because the plan on which you advise is too small, Jake Gilliam will set you straight.
“Plan sponsors thought they had to be big to use CITs; not true,” Gilliam, senior multi-asset class portfolio strategist for target date funds with Charles Schwab Investment Management, bluntly states. “Our CITs have low-to-no minimums. CITs are now accessible to all plan sponsors, and the assets in 401(k) are generally stickier.”
He notes the inherent bias some plan sponsors display towards target date funds in a mutual fund format because they’re familiar with the format and “can look them up in the paper.”
“Other plan sponsors recognize the benefits CITs can offer. Regardless, they should at least look to all strategies in the different delivery formats.”
Schwab CITs, which contain roughly $11 billion in assets, use sub-advisors to provide institutional investment management benefits to participants, are not beholden to any one particular manager.
They include Schwab Managed Retirement Trust Funds, Schwab Indexed Retirement Trust Funds, Global Asset Allocation and Schwab Institutional Trust Funds.
Putnam Investments
LIKE WE SAID, if you understand the 401(k) space and engage as an advisor in education and enrollment, you’ll be ranked highly no matter what product you offer to plan participants. Boston-based Putman Investments gets it.
“When it comes to CITs, plan sponsors like the pricing flexibility for fees, daily pricing, and in general people understand the regulatory framework and the safety they get,” says Scott Sipple, head of global investment strategies at Putnam Investments. “They’re not subject to the ‘40 act, but still subject to FINRA.”
When asked what makes Putnam different to get them named by Morningstar, Sipple stays diplomatic.
“It’s all shades of gray in this business, so hopefully we’re doing it better than our competitors. We have great client relationship people that can deliver a pricing structure that fits with the client. Between CITs, target date funds and stable value funds, we have the products that plan sponsors and participants are looking for.
Vanguard Institutional Investment Services
SHOULD PLAN SPONSORS use mutual funds or CITs? Doesn’t matter, says Kevin Jestice, nor should it.
“Plan sponsors often approach mutual funds, collective investment trusts, separately managed accounts and then look to whether it’s an active or passive product, the type of investment category, the asset class and the management strategy,” the vanguard principal and head of Vanguard’s Institutional Investor Services explains. “What we find is that the vehicle used is different from the underlying strategy.
So for instance, with Vanguard, the target date strategy is the same whether or not the plan sponsor invests in a mutual fund or a collective investment trust, Jestice adds. The particular vehicle enables different types of pricing from which they can then choose. A mutual fund may be more expensive but the ’40 Act provides different protections for sponsors and participants. Collective investment trusts might not be subject to certain regulations and therefore cheaper, but they won’t have the same protections.
“What we see are plan sponsors wanting a certain type of investment strategy and then accessing it through a vehicle at their price point, rather than simply demanding a certain type of product,” Jestice says. “Regardless of whether it’s a mutual fund or trust, Vanguard replicates the same target date process in each. We offer prudently-diversified, low-cost products. As we approach the 10-year mark on target date plans, and with the advent of policies like auto-enrollment and auto-escalation, we’re seeing a substantial rise in assets.”
This means there is more fiduciary focus, he concludes, and Vanguard sees the market supporting either structure.
“It’s a target date story, rather than a mutual fund of collective investment trust story. As plan sponsors grow, there’s an increased focus on pricing, and therefore increasing interest in lower cost products like CITs. In other words as they reach more scale, there is typically more use of CITs.”
Russell Investments
BREAK OUT THE SHOULDER PADS and parachute pants—we’re heading back to the mid-1980s, when Russell Investments’ bank began offering CITs.
“At that time, CITs were primarily offered in defined benefit plans,” Colette Taylor, president of Frank Russell Trust Company, helpfully explains. “Most defined contribution plans, by contrast, wanted mutual funds because they thought they were more transparent. Many CITs didn’t price daily, for instance. So traditionally, defined contribution participants wanted mutual funds. CITs were not believed to be as transparent, but over the past 10 years they have come on par.”
As a result, Taylor adds, plan sponsors can now see the price daily and see what’s in the fund.
“The cost to build CITs is much less than comparable products because they don’t have as strict of a regulatory burden. Plan sponsors are considered a ‘sophisticated buyer’ when compared with the individual in the market so the regulatory burden is less. A TDF in a CIT is generally cheaper than a TDF in a mutual fund which means more money in the 401(k) plan participant’s pocket. But we didn’t get to pay equality portion without transparency; the transparency had to come first.”
As for Russell, Taylor says they focus on small and mid-size 401(k) plan sponsors with their education and enrollment.
“That’s our strategy. Large plans know CITs and get it. However, running CITs means good governance and a fiduciary process and having low costs and meeting the needs of investors, rather than just getting a license and setting up a bank. People are out there renting their ‘trust shingle.’ From a fiduciary standpoint, I’m not sure that’s a good idea. At Russell, we eat our own cooking.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
